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Cracking the 'priesthood' of people who speak money

Today’s New York Times story on Argentina’s apparent financial default isn’t likely to make anyone more fond of hedge fund firms, except maybe those who, like the fund’s manager, tend to valorize the “rights of creditors.” The lead:

The hedge fund firm of billionaire Paul E. Singer has about 300 employees, yet it has managed to force Argentina, a nation of 41 million people, into a position where it now has to contemplate a humbling surrender.

Presented that way, the development seems an example of what Pope Francis had in mind when he used the term “savage capitalism” during a visit to a soup kitchen last year, and in fact, it’s exactly how Jubilee USA president Eric LeCompte characterizes it: “When Pope Francis has used the term savage capitalism he refers to a group of extreme actors who profit from exploitation of the poor. I can’t think of a more appropriate example than the actions of the vulture hedge funds and Argentina.”

Imagery and metaphor are inevitable in accounts of crises like these, precisely because they can be useful in beginning to understand details that can otherwise be confounding. More from the Times story:

The campaign against Argentina shows how driven and deep-pocketed hedge funds can sometimes wield influence outside of the markets they bet in … While Mr. Singer’s firm has yet to collect any money from Argentina, some debt market experts say that the battle may already have shifted the balance of power toward creditors in the enormous debt markets that countries regularly tap to fund their deficits. Countries in crisis may now find it harder to gain relief from creditors after defaulting on their debt, they assert.

“We’ve had a lot of bombs being thrown around the world, and this is America throwing a bomb into the global economic system,” said Joseph E. Stiglitz, the economist and professor at Columbia University. “We don’t know how big the explosion will be — and it’s not just about Argentina.”

Battles, bombs, and explosions. That Elliott, a small New York firm generally unknown outside financial circles, can wield such power over a distant sovereign nation says much about its arsenal: It manages more than $25 billion in assets, an amount accrued through returns of 14% a year since 1977. By that measure, Elliott easily meets, if not embodies, the definition of a successful fund. And why might it be so successful? Perhaps because a hedge fund isn’t a “hedge” in the way that term might suggest—and in fact once was used, even in finance.

a lightly regulated pool of private capital, one that is almost always doing something exotic—because if it weren’t exotic the investors could benefit from the investment strategy much more cheaply somewhere else. There will be a “secret sauce” of some sort, usually a complicated set of mathematical algorithms meant to insure better returns than the market in general delivers.

Hedge funds defend the fact that they’re so lightly regulated on the ground that access to them is restricted to people who know what they’re doing and can afford to lose their money.

It’s a concise and helpful explanation of the current function and “purpose” of hedge funds, and as such it helps moves us past the "beginning" of understanding such things. But that's exaclty Lanchester's larger and more important aim: the current world of finance has spawned a language of its own, so complex and specific, that he wants more people to learn it. The language’s chief characteristic is what Lanchester calls “reversification.” Thus are “securities” anything but secure, “austerity” not a way of living simply but a mechanism for cutting services, and “credit” debt:

These are all examples of how the process of innovation, experimentation, and progress in the techniques of finance has been brought to bear on language, so that words no longer mean what they once did. It is not a process intended to deceive, but … it confines knowledge to a priesthood—the priesthood of people who can speak money.

Helpfully running through Lanchester’s piece is a reasonableness that makes his prescription go down much more easily. No villains or vultures, but a general manner of appealing to common sense: “A shared language doesn’t imply a shared viewpoint,” he writes, yet that doesn't undermine the urgency of his case:

Low tax rates, a smaller state, a business-friendly climate, free markets in international trade, rising levels of inequality and an ever-bigger gap between the rich, especially the super-rich, and the rest—supposedly, these are just the facts of economic life if you want your economy to grow and your society to become richer. Many people are eager to tell us that there is no alternative to the existing economic order, that we have to accept things as they are. That isn’t true.

If you don’t agree with the priesthood of money-talkers on regulatory and economic policy, you should nonetheless have the ability to converse with them in the first place. After all, Lanchester reminds us, “incomprehension is a form of consent”:

If we allow ourselves not to understand this language, we are signing off on the way the world works today—in particular, we are signing off on the prospect of an ever-widening gap between the rich and everyone else....

Comments

Remind me not to borrow from a hedge fund! Following the links in Dominic's post, we learn that holders of Argentine sovereign debt have tried to impound an Argentine naval vessel and seize Argentina's version of Air Force One:

In their drive to extract full compensation from the Argentine government, a hard-nosed bunch of distressed debt investors have gone to impressive lengths. They’ve pursued the country’s assets around the globe, attempting to seize the presidential plane and menacing the Argentine booth at the Frankfurt Book Fair.

Now they have a big and bizarre fish on the hook: an Argentine naval vessel. NML Capital, a subsidiary of U.S. billionaire Paul Singer’s Elliott Capital, this week won an injunction in Ghanaian superior court to hold the ARA Libertad in the port city of Tema, on the outskirts of the African nation’s capital.

Those poor booth workers at the book fair - I am sure that is not what they signed up for. :-).

The situation does sound more than a bit like the neighborhood loan shark driving away with my Corvette because I lost my shirt on the bowl games last New Year's Day.

Still, I suspect I'm more sympathetic to Tea Party government-debt principles than most readers of dotCom, and I'm not ready to lump the sovereign government of a nation as large and developed as Argentina's into the same victim category as a recent college graduate with a social work degree who took out $100K in loans and is now working at McDonald's. Borrowing is risky - to both sides. A lot of lenders have taken a haircut lending to Argentina.

I concede that there may be an opportunity here to come up with a rational policy that would be more win-win than this current grudge match of Dirtbag Government vs Hedge Fund Vulture has yielded so far.

Thanks for informing about that marvelous essay by Lancester, Ironically it is a pithy, understandable article in a magazine who lives on windy, interminable articles. I heard another fund manager explain how debt mortgages your future. I have been careful about credit cards ever since. Debit cards, which can be used as credit cards are really the only way to go. Payday loans are scandalous. But someone has to educate those who seek them.

There are, of course, unethical hedgefunds and ethical ones. As Lancester points out most of them don't make it. So one does not have to be a tea party enthusiast to see that they could have good use. After all we can all choose to hedge our bets. Especially after being educated by Lancester. The federal government is active in fining hedge funds for breaking the rules. The government must raise the fines so that crime will not pay. As with the Cohen guy whose hedgefund, now with only his funds, is doing quite well.

As far as Argentina is concerned the story is more complex than some allow. The NY Times article was quite balanced in that it showed that for Argentina paying the debt is not as easy as one , even it has the funds, might think. Further, Argentina is certainly at fault for not employing smart financial managers. It is necessary that countries who incur debt should be compelled to pay them back.

There are examples of Wall Street Banks going to countries and persuading them to take loans that those countries may not be able to pay back. But it is the leaders who are at fault. They should learn to live withing their means.

The best example came from Lancester's father who said that the men he knew who were convicted of fraud in the banking field were those who invariably wanted to live beyond their means.

The Hedge Funds represent less than 1% of the total creditors. Argentina is paying the other bondholders who restructured approximately 93% of the debt. But the payment is frozen due to the twisted logic of the Federal Judge: everyone gets paid or no one gets paid. As always, it is and will continue to be the average Argentinian who will suffer most.

Re Vulture Capitalist Singer, amazing how you can build nothing, create nothing, invent nothing make nothing and yet become so rich with mere financial and legalistic machinations. Shows how phantasmagorical that the financial system can become. Shouldn't wealth somehow be related to creation of order, reversal of entropy.

Stanley - I agree that it is head-scratching that financial activity can be so far removed from what most of us would commonly perceive as the creation of value (e.g. generating new jobs, building new plants)*. I've long thought that it would be a matter of common sense to make a distinction, for purposes of tax and fiscal policy, between value-creating financial activity and market-liquidity/speculation activity. Surely whatever profits Singer derives from activity like this are income and should be taxed at roughly the same levels my wages from my employer are taxed.

* The case under discussion is not particularly exotic: Elliott seems to have swooped in and purchased some bad debt from bondholders of shaky loans to Argentina. Arguably, Elliott provided a useful and even necessary service; the willingness of investors to take risks on junk debts means that businesses and governments that otherwise wouldn't qualify for loans are able to get the infusions of capital they need to continue operating. In the world of hedge fund investments, I'd think that this particular venture is relatively simple and straightforward.

I will tell you one thing, if I were president of a soverign nation and someone tried to take one of my naval vessels , I would order it to sea with orders to open fire if necessary to protect my sovernity. My understnding of this is limited, but if I have it correct, this fund didn't actually loan any money. it purchased bonds that had already been defaulted on in effect at pennies on the dollar and is now trying to collect. Soverign nations have special rights and I would also simply condemn his interest in Argentine courts under Argentine law.

Jim D - from what I can glean from the Forbes story to which I linked, that Argentine vessel was in port in Ghana or at least in Ghanaian territorial waters, and the hedge fund went to a Ghanaian court to try to seize the asset. In effect, if the Argentinian navy did what you advise (and I had been thinking similar thoughts) it would have been engaging in what amounts to an act of war against Ghana.

I guess I shouldn't be as amazed as I am at how multinational - or maybe "anational" would be a better term - the hedge fund is. Whatever national sovereignties and jurisdictions happen to come into play, it leverages for its financial advantage. If a war ignites between a South American and an African nation in the pursuit of it's profits - so be it, apparently. It's quite a world.

There was a wonderful article in the Jan 18th issue of the New York Times "For The Love of Money". It totally explains the mentality of hedge fund mangers and there uselessness. They are perfectly described in the phrase "savage capitalist. If I were Argentina, I would do what I felt is the best for the country. I might ignore the hedge fund pay off the bond holders and let the chips fall where they may. I have no use for hedge funds or there managers. I know this is not up to the usual rational explanations on this site, but some things are just wrong and hedge funds are among them.

In the Old Testament, there is the concept of jubilee, a periodic wiping clean of the balances that have built up. It recognizes that after a point, continuing to demand repayment is contrary to justice. Both the lender and the borrower are responsible for determining whether the loan is a good thing. A lender who knows getting repaid will require the impoverishment of the borrower is just as wrong if not more so than a borrower who borrows when they do not know how they will repay.

I don't know that it would be an act of war. Nations cannot allow their military vessels to be taken by another nation under color of law. Vessels, including military ones, are sometimes taken for violating territorial water and so forth, but that too is considered an act of war...I seem to recall more than a few incidents of that type, one involving North Korea and an American ship, another with maybe China. An aircraft too. the Mayaguez incident resulted in a US attack on Cambodia to rescue the ship and crew. regardless of what a court orders, no sovereign nation could allow its military to be taken to pay a debt. I'm not sympathetic to people who buy high risk bonds, which they know to be high risk at the time, and then lose the bet. And frankly regardless of the cost, Argentina can't really give in on this. It makes it impossible to borrow perhaps, but ultimately that will be resolved by somebody, becasue you can't allow the world's 27th largest economy to fail entirely. And nations, even those in debt, cannot surrender spending and policy-making decisions to a private entity, especially an outside entity. Nor can it bow to pressure from other courts. national soveignity is meaningless if a US federal court , or a Ghanian court for that matter, can demand Argentine surrender on this point . Can you imagine if an Argentine court ordered the US to do anything? And apparently everyone is in agreement on a debt restructuring but this fund has refused to participate. I think if Argentina gives in, it ceases to be a nation.

This is just a contract dispute. Just because Argentina is a sovereign should not mean it can unilaterally abrogate a contract it freely and with full knowledge entered into. Argentina agreed, as a condition of selling its bonds (ie receiving a loan) that any disputes would be resolved according to NY law. Thats why the issue is being adjucated by a NY court. Choice of law clauses of this type are ubiquitious in bond/loan agreements.

According to this Reuters article from a bit earlier today, the financial world is now formally taking the position that Argentina has defaulted. It also notes that the two sides have been ordered by the NY court to work with a mediator to try to strike a deal.

I would think it could be a difficult negotiation: the hedge fund we're discussing here seems to have purchased the junk debt for pennies on the dollar from whoever was the previous holder. From its point of view, the deal would seem to have relatively little downside and potentially a huge payoff.

The amount in question seems to be about $1 billion, which isn't a ruinous amount for the Argentine government. Apparently, the financial markets are betting that a deal gets worked out.

Lanchester's article in the New Yorker is a little masterpiece. But pay attention also to the same magazine's James Surowiecki, very good about explaining arcane economic concepts such as why paying people too little is an unhealthy sign in an economy supposedly based (to some extent at least) on consumerism.

And while we're on the subjects of demystifying economics (to say nothing of other social "sciences," a word of praise also to Charles Morris, a frequent contributor to this magazine.

Or, if you prefer the word, Kudos, as long as you don't treat it as a plural as is now so often the case (Jim gets two kudoes, but Margy gets three, etc. etc.)

Re: Lanchester's piece: technical terminology and jargon are found in all walks of life. To take a trivial but irritating example: consider baseball. For generations, statistical categories like batting average, fielding average, RBIs, ERA and pitcher's won-lost record were well-understood, not only by the players, management and scouts and the media who covered them, but also by millions of fans. The stats appeared in newspaper agate and on the backs of baseball cards. And for the most part, baseball executives used them to rate their players and determine their compensation.

There is now a new generation of baseball metrics, developed by the so-called sabermetricians, that I find opaque. A statistic known as OPS began showing up in sports page articles about 10-15 years ago. OPS (if I'm not mistaken) is a sort of a compound acronym, combining On Base Percentage (OBP) Plus Slugging Percentage (SP). Both OBP and SP in turn have definitions which I more or less understand (although I wouldn't want a million-dollar game show prize to depend on my defining them precisely). But I'm sure I wasn't the only baseball fan scratching my head when the term first started to move into the mainstream media, and no doubt there are fans today that still are puzzled by it.

Nowadays there is a sabermetric known as WAR (Wins Above Replacement) that seems to be the gold standard for assessing a baseball player's value. A couple of months ago, I googled it to see what it consisted of. It turns out that the calculation of WAR is a combination of a variety of other sabermetrics that in turn depend on yet other sabermetrics, virtually none of which I had ever heard of before. An entire edifice of arcane measures has been built by statisticians, which determine millions upon millions of dollars of compensation for these young men from Caifornia, Santo Domingo, Cuba and Japan, almost none of whom, I'm willing to wager, can explain the mathematical basis for WAR. It wouldn't surprise me in the least to learn that university statistics departments are now offering undergraduate courses in sabermetrics, because the field seems ot be amenable to that level of intellectual engagement.

We visited Argentina in 2000 when the Argentine Peso and American Dollar traded at par with each other. When their economy went sideways a year later, the IMF and western European and American banks all withdrew support for their Peso and hastened its demise. Then their own government, in a self-defense effort, prohibited peole from converting their Pesos to Dollars or exporting dollars from the country. The ultimate stable currency then became 8 Argentine Pesos to one U.S. Dollar. Mr. Bush and his colleagues stood by doing nothing. Obviously, someone, holding dollars, made a fortune.